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January 1, 2002

5 Min Read
Reverse auctions put the squeeze on molding profitability

0102i29a.gif Say the words "reverse auction" in a room full of molders and immediately the group will likely respond with howls of protest against what has, for them, become a way to destroy business relationships and erode even further already thin profit margins. Nobody wins in the reverse auction climate, claim molders who've found themselves competing to keep business they've had for many years. 

Research Shows . . . 
This assertion is backed up by David Stec, a researcher at Rensselaer Polytechnic Institute's Center for Lean Business Management (Hartford, CT), who conducted a study of reverse auctions and found that few companies on the buying side of the equation understand the total costs associated with their products. Generally, Stec and his partner in this study, M.L. Emiliani, found that reverse auctions impact the supply chain negatively. 

"If you look at the commodity in general and draw a similarity between molded parts and other types of commodities—make-to-print-type parts—there are multitudes of suppliers of these parts, so big buyers can leverage their clout and use reverse auctions to their benefit short-term," says Stec. "It's a commoditization point of view—multiple suppliers, each trying to underbid the other to get the work." 

Stec points out that this method is still traditional, power-based marketing in which a buyer shops for low overhead rates from other suppliers, and then puts the part out for bid to see if the incumbent (current supplier) will come down in price. "The maximum benefit to OEMs comes from resourcing," says Stec. "Buyers must be willing to resource parts to get the best price, which puts them at high risk." 

The risk of resourcing, explains Stec, includes the chance that the new supplier won't be able to do the job as well as the former supplier, which can delay delivery and increase quality problems. 

This is where the lack of understanding of the total cost of molded part ownership comes into play. A purchasing agent sees only the cost of the particular part he is charged with buying. Dealing only with the cost metric, says Stec, the purchasing agent might say, "my job is just cost, and someone else has to worry about delivery and quality." 

The biggest problem molders have with reverse auctions is that so few OEMs know the true cost of running molds.

Stec adds that buyers get pushed into trying to find new suppliers by corporate drives to reduce the overall cost to manufacture. "The guy [supplier] who's hungry is the one they want in the mix to drive the price down," says Stec. "Buyers suffer the complete risk of resourcing and find out it's not the quick-fix method of reducing costs." 

Yet, buyers are often willing to cut their own throats long-term for the short-term fix. "This is how they get rewarded," says Stec, "saving a buck today." 

One molder with whom IMM spoke told of a purchasing agent who lost his job over a reverse auction that went bad. The new supplier couldn't get the molds to run, so it told the OEM that to get the pricing quoted in the auction, the OEM had to purchase new molds. The OEM said, "The other molder could make them run, why can't you?" 

This brings up another issue, which is the value of a long-term relationship. Molder A in the previous paragraph had been running the molds for 10 years. He knew the molds' idiosyncracies. He knew the molds' processing parameters, which ran better in which press, and what it took to get a silk purse part out of a sow's ear mold. The true condition of a mold is not known to bidders who might become the new parts supplier. 

Molders find that it's particularly difficult to participate in a reverse auction when the parts out for bid are the ones they are currently molding. "The guy who's running the part and bidding has an advantage because he knows how the tool runs," this molder says, "and he's also at a disadvantage for the exact same reason, because he knows how the tool runs." 

Costs of the Game 
Reverse auctions can also be very expensive. One molder, who asked not to be identified, says he recently received a box of more than 100 parts and prints in the mail, along with pages of bid sheets to fill out for existing tooling being auctioned. The cover letter noted that the company hired to do the reverse auction had sent the information out to 60 shops to participate in the online bidding process. 

"They hire this firm to run the auction and they don't know [anything] about molding," says this frustrated molder, who suddenly found himself bidding on molding work he was already doing. 

This molder estimates that his staff spent 250 hours preparing quotes, including several hours consumed sorting through partial and faulty information—incorrect part numbers, part weights, and cavitation specifications. 

The biggest problem molders have with reverse auctions is the fact that so few OEMs know the true costs of running molds. And those costs vary from molder to molder. A new supplier may bid low on the parts just to get the job in the door, but, adds one molder, "Nobody runs jobs at a loss forever." 

Stec notes that one of the cornerstones of a good supply chain is mutual respect and a long-term, stable relationship, which reverse auctions can put at risk even if the present supplier keeps the work. "A reverse auction takes 25 years of partnership and trust and shoots it in the heart," says our anonymous molder. If costs do become a concern for the OEM or if problems exist between the OEM and supplier, Stec says there needs to be "collaborative problem solving" between the supplier and the OEM. "There's a lot more in this mix than just price," he adds. 

Is there anything molders can do to keep from getting caught in the reverse auction trap? Stec says there are ways to band together as supplier groups and become more resistant to these tactics. "But, they have to be willing to endure the consequences," he cautions. "And there will be consequences." 

Contact information
Center for Lean Business Management,
 Rensselaer Polytechnic Institute
Hartford, CT
David Stec
(860) 548-2439
[email protected]

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